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Investment for Expats in Portugal

Submitted: September 2014

A large range of investment products is available on the Portuguese markets for retail investors, including shares, bonds, mutual funds, structured products, leveraged investments, and derivatives generally.

In Portugal, the typical problem expats would encounter in relation to investments is that English language is not widely used. Consequently, the information you are looking for may be available in Portuguese language only.

 

Beating inflation and taxes

As in any country, expats must beat inflation and taxes to preserve the real value of their savings.

As regards taxes on capital investment in Portugal, they are quite in line with European standards.  Capital income may be taxed separately at a flat 28% rate, but you can elect to apply the progressive rates.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with Portuguese inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside the Eurozone but you invest in any Euro-denominated assets, you are effectively making a currency bet. This is because you never know how the exchange rate will be when you need to repatriate your funds.

 

Inflation in Portugal

The European Central Bank (ECB) is strongly committed to price stability, i.e. inflation must be slightly below 2% over the long-term. In practice, the ECB is solely concerned with inflation throughout the Euro-zone, which is nothing more than an aggregate.

Portugal has traditionally been a high inflation country, with inflation rates frequently between 2 and 4%. However, the Euro-zone crisis may have changed this durably. In 2014, Portugal entered into deflation again – the second time since 2010. As of July 2014, Portugal’s inflation rate stands at -0.90%, i.e. considerably below the Euro-zone aggregate (+0.4%).

For more information on monetary policy, see Foreign Exchange for Expats in Portugal.

 

Savings accounts and term deposits

In Portugal, term deposits tend to have much better yields than easy-access accounts. Usually, there is no need to lock up your savings for more than a year.

It’s best to shop around in order to find the right savings account. If you do things right, you could get an interest rate of 2%, which is currently much above today’s inflation rate.  Don’t forget that this is gross interest, so withholding taxes may apply thereon (generally 28%).

 

Collective investment products and life insurance policies

Portuguese banks generally have investment funds on offer. Usually, the investment strategy of the fund will be made clear at the outset, e.g. low-risk/low-yield, fixed-income, high-risk, emerging markets, etc. Commission charges apply, but you don’t have to check the financial markets every day.

Alternatively, you can seriously consider investing through an endowment policy. As in many EU countries, endowment policies can be quite tax-efficient in Portugal. Compared with traditional investment funds, endowment policies may have the following disadvantages:

For more information on life insurance, see Insurance for Expats in Portugal.

 

Portuguese securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade securities in Portugal. A share dealing service may be available at some Portuguese banks, but not all.

Generally, you should look for an intermediary that extensively tries to sell brokerage services to retail clients, i.e. not a traditional bank. If you do things well, trading Portuguese shares can cost you no more than €7 per trade, with no account management fees.

In traditional banks, here are the main costs you should be aware of:

 

Portuguese shares (overview)

Portugal’s main index is the PSI 20. As of today, the PSI 20 is just above its all-time inflation-adjusted low, reached in June 2012 (when the PSI 20 fell to 4500). This is because the Euro-zone crisis has forced Portuguese interest rates higher, not to mention lower Portuguese corporate earnings. This means the potential for capital gains is high. In current market conditions, high-dividend companies can pay over 4%.

It should be noted that many of Portugal’s listed companies are struggling to generate profits. Struggling firms should be avoided, as it can take years for the market to fully/accurately price how bad a company is.

Be wary of volatility when you invest in securities. Stock market variations are very dependent on interest rates. If they are going down, stock prices should eventually rise. At the moment, Portuguese interest rates are calming down, but they might rise again if turmoil resumes in the Euro-zone.

 

Fixed income

Given the poor yields on savings accounts, expats may serious think of investing in fixed-income securities. In Portugal, the yields are quite high, though the trend is down.

The yields on Portuguese Government debt have strongly decreased over the past year. A 10-year Government bond would get you 3.2%, down from 7.4% in September 2013. Yields have still some room to go further down. By contrast, French 10-year OATs offer 1.3% whereas German 10-year Bunds will get you no more than 1%. Of course, you are likely to find higher yields on riskier corporate bonds.

Government bonds are subject to market variations. Bond prices rise when the market demands a lower yield, and they shrink when the market demands a higher yield. Over the past year, Portuguese bond investors have made substantial gains because interest rates have gone South. As the Euro-zone is subject to high deflationary risks, the ECB has a strong case to engage in further monetary loosening. Interest rates on the market have therefore some room to move further down.

 

Investing overseas

There is no special need for Portuguese residents to park their investments outside Portugal in the sense that Portugal has acceptable financial markets.

For expats however, it may make sense to keep their savings and investments in their home country. Doing so may be much more straightforward to do.

 

 




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